China – Sales contract 

I am frequently asked by my clients to revise sales contracts prepared by their actual or prospective Chinese counterparts.

I normally advise that it is much easier (and cheaper) to throw away the one they have received, which in most cases is a frankestein copy-pasted from different sources, drafted in poor English and with a Chinese version widely different from the English text, and to replace it with a good, new text, drafted by our law firm.

The first point which is important to know is that contracts can be drafted in a foreign language: they are perfectly valid in China even without a Chinese version, but a bilingual text is often expected and is definitely recommended.

Keeping in mind that the Contract one day can end up in a Chinese Court, where only Chinese is read and spoken, to foresee from the start that the Contract has a Chinese version, corresponding to the English one and using the right legal terminology, is a guarantee against misunderstandings, especially from the Judge himself.

That said, a common piece of advice is to keep the agreements simple and concise: we have seen how negotiations are usually long a can be a painful experience: you don’t want to start to discuss a contract with 15 pages of definitions, unless it is strictly necessary.

The best way to proceed is to prepare your own standard contract, have it translated into Chinese and have it reviewed by a Chinese lawyer, and then to propose it to the Chinese counterparts and work on that text.

The other way around, to work on a document prepared by the Chinese side, unless you are dealing with lawyers who have a good expertise of international trade and contracts, may be a bad idea, as it can usually be a frustrating and time consuming experience.

Last but not least: it is not sufficient to sign the contracts (possibly in every page): keep in mind that in order to be valid the contract needs to be stamped with the chop of the company, which is a uniquely carved piece of wood made by the local authorities.

To be on the safe side, it is better to have the contracts stamped: moreover, it is not a good sign if the person who signs the contract is not in possession of the chop, as this may mean that he is not the legal representative and has no power to bind the company.

CISG: it is applicable and you should not opt out.

The People’s Republic of China has ratified the Vienna Convention on the international sale of goods of 1980 (CISG) in the year 1986, with the result that the uniform law is an integral part of Chinese laws.

It is important to underline that China has made two reservations, under art. 1 (1) b and 11 of the CISG.

Under the first article, China refuses to apply the uniform law in cases where one of the parties is not resident in a contracting state, so indirect application is ruled out.

The second reservation is less substantial: China requires the written form for the validity of a contract of international sale of goods, while this is not required under domestic law (as Chinese Contract law of 1999 provides that contracts ‘may be made in written or in oral or any other form’).

It is never a good idea to enter into on oral agreement of international sale: in the specific case of China, this is even more true as the agreement could be voided.

We all know why it is important to apply the CISG and the reasons why it should not be ruled out, if possible: it is a common regulation  of the parties’ obligations, which covers most of the important points of a sale contract and avoids the difficult task of choosing which law should apply to the sale agreement.

Another issue which is important mentioning when talking about international sales with China and CISG, is that, even though CISG is part of Chinese law, courts tend to apply it in a singular way.

Art. 142 of the General Principles of Civil Law of 1986 states that ‘the provisions of international treaties concluded or acceded by the PRC apply when they differ from the provisions of civil laws of the PRC’.

In most cases this leads to the application of Chinese law, because its provisions are often similar to the ones of CISG, or because national judges are not familiar with CISG.

In order to avoid this, parties have to indicate in the contract that they wish to apply ‘exclusively’ the CISG, otherwise the application of the uniform law might not be guaranteed.